By Jamie McGeever
ORLANDO, Florida, Sept 8 (Reuters) - A mood of nervous caution hung over U.S. markets on Tuesday, as flaring hostilities in the Middle East pushed oil to a six-week high and Brent crude futures close to $100 a barrel, while the Japanese yen extended its strong gains to hit a seven-month high against the dollar.
In my column today, I push back against the narrative that the U.S. government bond market is cracking. Sure, yields are rising — inflation is sticky, nominal growth is strong,
and federal debt is high — but the increase in borrowing costs appears to be in line with "fundamentals". Zoom out, and yields at current levels are not unusual, either. Far from it.
Today's Key Reads
• A blistering rally in the Japanese yen ahead of an expected interest rate hike from the Bank of Japan next week is upending the long-established and lucrative carry trade, as investors rethink the path ahead for the volatile currency.
• The U.S. bond selloff that started with the war with Iran has pushed the 10-year Treasury yield up near 5%, a level it hasn't held for long in almost two decades. What happens if and when it arrives?
• Yemen's Tehran-backed Houthis attacked four cities in the south of U.S. ally Saudi Arabia on Tuesday, wounding more than 70 people and setting oil installations ablaze in what appeared to be a major expansion of the six-month-old Middle East war.
• Global oil benchmark Brent crude has rallied this month but stayed below $100 a barrel despite recent escalation in the U.S.-Iran conflict that has disrupted Gulf exports from the Strait of Hormuz and the Red Sea. Here are some of the factors driving oil prices.
• Donald Trump's unfathomable link between U.S. interest rate policy and trade ties with America's biggest partners led to more head-scratching than market impact. But the strangeness of the president's take offers Federal Reserve Chair Kevin Warsh an opportunity to convincingly distance himself from the White House and bolster his credibility by pushing for a Fed rate rise this month, argues ROI's Mike Dolan.
Today's Key Market Moves
• STOCKS: Japan -1.7%, Europe and UK dip slightly. Switzerland -1.5%. Wall Street in the red: Nasdaq -0.3%, S&P 500 -0.6%, Dow -1.2%.
• SECTORS/SHARES: Eight sectors on the S&P 500 fall, three rise. Software stocks -1.4%, healthcare -2.5%, energy +1%. Intel +9%, Amgen -10%.
• FX: Dollar/yen dips below 153.00, down more than 10 "big figures" since late July intervention. Euro/yen lowest since November last year. Chilean peso +1%.
• BONDS: U.S. yields mostly steady. U.S. 3-year auction draws highest bid-cover ratio since last November.
• COMMODITIES/METALS: Oil climbs to 6-week high, Brent a whisker from $100/bbl, WTI +~2%.
Today's Talking Points:
Make bonds great again
According to Bank of America, long-dated Treasuries have returned -2% over the last 10 years, the worst period for over a century. Other estimates put real returns over the period at around -5%, the worst performance since the Volcker shock. But are bonds cheap enough now?
The risk-reward balance for owning bonds now would appear to be more compelling from a relative value perspective, for income, and for portfolio diversification. The 10-year yield is approaching 5%, which will likely be a "buy" for many investors. A BCA Research client poll shows 44% favor locking in yields at these levels, while PIMCO's Lotfi Karoui writes: "Balanced portfolios are back: Higher bond yields are restoring fixed income’s role as both a potential source of income and a powerful diversifier."
Won of a kind
The Japanese yen's surge has grabbed the headlines, but it has not been the most remarkable Asian currency performance of late. The South Korean won has soared some 16% against the dollar over the last couple of months, and is trading at its strongest level in nearly two years. Does the rally have legs?
Capital Economics analysts think it does. Foreign investors' net selling of Korean equities has eased, and Samsung and SK Hynix are investing domestically in size, which should spur repatriation of profits currently held offshore. If Fed rate hikes and higher U.S. bond yields deflate the AI bubble on Wall Street, expect Korean retail investors to repatriate too.
Tarrifying
Canada's planned retaliatory tariffs on U.S. goods took effect on Tuesday, ranging from 15% to 50% on up to $20 billion worth of products from its biggest trading partner. The rift between the two neighbors — and apparent allies — has affected steel, aluminum, automobiles, lumber and other industries. It could get worse before it gets better.
President Trump has threatened 50% tariffs on Canadian cars, trucks and automotive parts, effective January 1, 2027, and on Monday he said Canadian private jet maker Bombardier would no longer be allowed to sell its planes in the U.S. unless it started manufacturing in the country. Trump has midterm elections in two months, so he may not back down for domestic political purposes. Prime Minister Mark Carney doesn't seem that way inclined either.
What could move markets tomorrow?
• Japan non-manufacturing tankan index (September)
• China PPI inflation (August)
• China CPI inflation (August)
• Taiwan trade (August)
• U.S. Treasury sells $39 billion of 10-year notes at auction
Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(Reporting by Jamie McGeever; Editing by Nia Williams)
